TRC 001: Questions founders should ask VCs

Read time: 5 minutes

The decision to take venture capital (VC) funding is a big one for founders.

It's a major step forward for any startup that can open up new opportunities, but also comes with risk and requires significant amounts of time and effort.

That's why it's important for founders to be well-informed about the VCs they're considering taking funding from.

Here are some important questions founders should ask before taking investment from a VC:

Will they lead a round?

You can’t close a round without a lead. The lead investor writes the term sheet and takes point on the due diligence. Finding one is key.

It can be much easier to find VCs who will participate, but if they don’t lead, your round can get stuck or fall apart.

Don’t leave it several meetings and many weeks before you find out the answer to this question. It can save you a lot of pain, and even more heartache.

How often do they “follow-on?”

It’s good to know if the VC you are talking to has a habit of following on with the investments. If they don’t, can’t or only rarely do, this can introduce risk into your next round.

Having current investors participate in future rounds is an important ‘signal’ to potential investors that your current backers believe in your future success.

It also helps if they have the ability to support you with funds if getting to your next key milestone for fundraising takes longer than anticipated.

What percentage of the fund is this investment?

You want to know how important the investment in your company will be.

Is this a big bet for them? If it is, you know that they have a greater interest in your success. The only thing to consider is that this can also come with much greater scrutiny.

Who will we work with if you invest?

You are likely to meet a number of people in the process of raising from a VC.

It is important to understand who will be your point person. Chemistry is important, but so is there ability to make things happen for you without referring too much to others in the fund.

Get to know who you will be working with.

What kind of support can I expect?

Any investor should be willing to provide more than just financial support—they should also be able to give you guidance and advice as needed.

Ask potential investors what kind of other resources they can offer, such as mentorship programmes, access to industry contacts, and introductions to customers and partners. These resources could be invaluable in helping you take your startup to the next level.

Some VCs will largely ignore you until things start going well.

This question can help you understand what type you are dealing with.

Something not to ask but to find out:

Get a reference from the founder of an unsuccessful investment.

Ask anybody for a reference and they will always be happy to give you a list of people who will provide one that glows. It’s easy to do when things are going well.

What you want to do is to chat to a founder that dealt with them when things were going less well.

How did they behave?

How supportive were they?

People understand that things don’t always go smoothly, but there can be a BIG difference between an investor who is there to support when things aren’t going smoothly and one who drops you like a stone at the first sign of trouble.

It’s good to ask questions, although not necessarily all at once.

You definitely want to know if a VC will lead as early as possible, so you can prioritise a search for one if they don’t.

Other than that, try and pose the questions in emails and conversations over time.

Even great investors won’t be at their best in an inquisition.

TLDR

Will they lead a round?

How often do they “follow-on?”

What kind of support can I expect?

What percentage of the fund is this investment?

Who will we work with if you invest?

Get a reference from the founder of an unsuccessful investment of theirs.

How somebody has behaved before is typically more telling than what they might promise about how they will behave going forward, so it is important to do your diligence on the fund and the people you will have involved.

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